Once this economic crisis (eventually) passes, is this the end of truly fiat currency?
secondrepublic
Posts: 2,619 ✭✭✭
Some interesting comments from the head of the European central bank last week, who said that officials reshaping the world's financial system should try to return to the "discipline"' that governed markets in the decades after World War II.
"Perhaps what we need is to go back to the first Bretton Woods, to go back to discipline,'' Trichet said after giving a speech at the Economic Club of New York yesterday. "It's absolutely clear that financial markets need discipline: macroeconomic discipline, monetary discipline, market discipline."
LINK to article.
How do you all read this? Especially the comments on monetary disclipline, which I read as a major shot against fiat currency, particularly the US dollar.
"Perhaps what we need is to go back to the first Bretton Woods, to go back to discipline,'' Trichet said after giving a speech at the Economic Club of New York yesterday. "It's absolutely clear that financial markets need discipline: macroeconomic discipline, monetary discipline, market discipline."
LINK to article.
How do you all read this? Especially the comments on monetary disclipline, which I read as a major shot against fiat currency, particularly the US dollar.
"Men who had never shown any ability to make or increase fortunes for themselves abounded in brilliant plans for creating and increasing wealth for the country at large." Fiat Money Inflation in France, Andrew Dickson White (1912)
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Comments
unless they had absolutely no alternative. I think many more varieties of
the same old thing will be tried before the world seriously considers
going back to currencies backed by tangible assets.
I'd also bet the world as we know it today would be pretty much done brfore that
happens.
...
Rejecting the 1944 Bretton Woods agreement in 1971 literally allowed the US to steal from the rest of the world. We all have profited from it. And unfortunately it's not going to continue. Our increasing standard of living in the 1980's to 1990's was the main result, though not without cost as we are seeing today. It was free up to 2007, but not any longer. The EU leaders are right. The UK themselves sold half of their CB gold to help keep gold sequestered and the dollar strong along the way. They are probably smarting now at that decision as are the rest of the EU countries that sold CB gold to support the dollar. Hmm, looks like it's getting about time for that gold-backed amero.
Dr. Fekete below argues the delinking from gold has essentially caused the destruction of the banks, first from high interest rates and then with slowly declining interest rates over the past 26 years. As interest rates have been dropping, the cost to service the ever-increasing debt has been rising. The banks today cannot service their debt. Most pro-fiat supporters simply discredit this type of analysis because it comes from a gold-backed currency supporter. And therefore it cannot be right. Fekete's just a whacko like Sinclair, Schiff, Paul, Murphy, Puplava, Rogers, Casey, and all the rest. And pay to no mind to these guys even if what they predicted 5-10 years ago is now coming true. They're still whacko's because they believe in a barbarous relic-backed economy rather than Monopoly Money. Goldilocks should continue to believe in Allan, Ben, and Hank even if they've not been right on any major financial decision in years. But they got our backs right?
Bank capital destruction following a pure fiat system
roadrunner
If there were a gold backed currency, the metal would have to be stable within some range or even fixed on international markets be they in USD or whatever. Not that it would be a bad thing to have metal fixed, it may actually be a good thing in that people would have access to a stable currency and could save something that has internationally recognized value. I had postulated previously that some country surely could come to the conclusion that if they made a stable, asset backed, internationally acceptable currency backed by gold, diamonds, or any physical asset like oil for example, they would then have the new world currency. It could be the UAE, the Japanese, the EU, even the US but the opportunity is there for the taking. Imagine, if you could simply produce a currency that everyone could have confidence that it was backed by real assets and had value. With existing world currencies, they have no actual value in terms of being backed by real assets. US currency is backed by the full faith in a government that has a 9% approval rating, that's certainly reason for confidence and optimism but you wonder if we are much different than the other major governments in terms of confidence, particularly when it is related to currency. It would seem that any country that could come up with an asset backed currency at this period in our history would become the next world banker. Simple concept but complicated in terms of realization.
And what happens to current holders?
R
OK. bring it on!
I'm ready to retire quite comfortably.
Now there's a golden parachute!!
John Marnard Keynes, The Economic Consequences of the Peace, 1920, page 235ff
That is, the debt can't be serviced anymore.
The Collapse of a 300 Year Ponzi Scheme
All the king’s men cannot put the private banking system together again, for the simple reason that it is a Ponzi scheme that has reached its mathematical limits. A Ponzi scheme is a form of pyramid scheme in which new investors must continually be sucked in at the bottom to support the investors at the top. In this case, new borrowers must continually be sucked in to support the creditors at the top. The Wall Street Ponzi scheme is built on “fractional reserve” lending, which allows banks to create “credit” (or “debt”) with accounting entries. Banks are now allowed to lend from 10 to 30 times their “reserves,” essentially counterfeiting the money they lend. Over 97 percent of the U.S. money supply (M3) has been created by banks in this way.5 The problem is that banks create only the principal and not the interest necessary to pay back their loans. Since bank lending is essentially the only source of new money in the system, someone somewhere must continually be taking out new loans just to create enough “money” (or “credit”) to service the old loans composing the money supply. This spiraling interest problem and the need to find new debtors has gone on for over 300 years -- ever since the founding of the Bank of England in 1694 – until the whole world has now become mired in debt to the bankers’ private money monopoly. As British financial analyst Chris Cook observes:
“Exponential economic growth required by the mathematics of compound interest on a money supply based on money as debt must always run up eventually against the finite nature of Earth’s resources.”6
The parasite has finally run out of its food source. But the crisis is not in the economy itself, which is fundamentally sound – or would be with a proper credit system to oil the wheels of production. The crisis is in the banking system, which can no longer cover up the shell game it has played for three centuries with other people’s money. Fortunately, we don’t need the credit of private banks. A sovereign government can create its own.
John Embry - Oct 17th - engineered takedown of July commodities & metals
5700 DOW by 2012 - Ron Cooke
roadrunner
Knowledge is the enemy of fear
<< <i> How will the dollar compete in the world against a backed-currency? >>
Lets think about how that would work. To the extent that the gold country is an importer of goods in world trade, it will be able to buy lots of stuff (from US companies for instance) seemingly cheaply with strong currency, at first. But then it will suffer an outflow of its currency and if the currency is really backed by gold, the holders of that currency will call for gold, resulting in a net out flow of gold and a contraction of the country’s currency. If the out flow is big enough, and the contraction great enough, the country will be left destitute. In the meantime, businesses in cheap currency countries like the US will have prospered by selling a lot of goods to the gold backed country.
To the extent that the country is an exporter at the time it goes on the gold standard, the price of its exports will rise in the world market. Unless the country has a monopoly on the goods it exports, other countries will shop elsewhere. Businesses in the country will suffer and recession will take hold. To the extent businesses in the US compete with businesses in the gold currency country, our companies will steal away their customers. The economy of the gold baced country will contract and the country will be left with a gold backed currency but will be poorer.
CG
A medium of exchange either has to be something real or it has to be based upon unquestionable trust. Well, the trust has been obliterated, so that leaves "something real" as the remaining option. A medium's value is established by its utility. The main utility of gold is that of universal appeal and that it can't be mass-counterfeited, and it CAN be physically audited - some very basic tenets that point to gold as re-establishing itself as a good medium of exchange.
I knew it would happen.
<< <i>If fiat currency survives this crisis, then why shouldnt it flourish in the future? >>
The current system of fiat currency (specifically, the dollar as a fiat reserve currency) could continue if there is the political will to allow it to continue. But my sense is that a lot of people, including Trichet, are losing their appetite for it. Trichet is probably the second most powerful central banker in the world, and he appears to want to return to a system where currencies actually have some support under them, as they did under Bretton Woods.
The problems with the post-Bretton Woods system are pretty clear. The current fiat system has allowed huge global imbalances, like the US trade deficit, to grow and create huge instabilities. By definition, a "reserve" should be stable. But if foreigners were to stop buying US assets, specifically US treasuries, the US dollar would literally collapse overnight. How can that be a stable basis for the world's so-called reserve currency?
The huge US deficits that arose under the post-1971 fiat system would have been impossible under Bretton Woods, for the simple reason that if the US had to redeem its dollars for gold, it would have run out of gold a long time ago. Interestingly, 1971, the year Nixon closed the gold window, was the first year the U.S. ran a trade deficit in the 20th century. LINK. For the preceding century, we uniformly ran trade surpluses.
Knowledge is the enemy of fear
The real issue is whether a fiat US dollar will continue to be the world's reserve currency. The argument you seem to be making is that there is nothing else to invest in which provides the same level of financial stability. That argument seems to me ludicrous. The Wall Street Journal reported that this fiscal year (which started Oct. 2007) the US budget deficit may approach $1 trillion (more than twice as large as any prior deficit). The US has enormous unfunded Social Security and Medicare liabilities also coming due. If you read the literature, the net present value of those liabilities is $62 trillion. If the government had to accrue those costs like a normal business, its deficit would be $4 trillion this year alone! Add to that a $700 billion-plus annual trade deficit. Does that seem to you a stable foundation for a world reserve currency? It seems quite the contrary.
The argument seems to be that foreigners will keep buying US dollars because if they don't, the dollar will fall and they will incur big losses. There are several problems with this argument, but the biggest one is the assumption that foreign countries are motivated solely by financial concerns. If China could knock the US off its perch as top dog worldwide for the cost of a few hundred billion in paper losses, do you really doubt they would do so? That seems to me a relatively cheap way for them to take the mantle as #1.
Second, it just takes one relatively big player to begin dumping their treasuries, and others will quickly do so. The scenario would unfold very rapidly, like a bank run.
As for the argument that there's nothing else to invest in, look around you. There is a whole world of potential investments, from physical assets to financial assets, worldwide. While many of them now look shaky, I don't believe the US financial system is anywhere close to being the most stable among them.
The sooner this all shakes out, the better, whatever the pain. And if we and the world don't take this opportunity to redefine the monetary base for financial transactions, we'll be dumb as well as broke.
Here's a warning parable for coin collectors...
<< <i>Who ever said the USA wouldn't be around? That's not the issue. Nor is the issue whether the US dollar will survive. Of course it will.
The real issue is whether a fiat US dollar will continue to be the world's reserve currency. The argument you seem to be making is that there is nothing else to invest in which provides the same level of financial stability. That argument seems to me ludicrous. The Wall Street Journal reported that this fiscal year (which started Oct. 2007) the US budget deficit may approach $1 trillion (more than twice as large as any prior deficit). The US has enormous unfunded Social Security and Medicare liabilities also coming due. If you read the literature, the net present value of those liabilities is $62 trillion. If the government had to accrue those costs like a normal business, its deficit would be $4 trillion this year alone! Add to that a $700 billion-plus annual trade deficit. Does that seem to you a stable foundation for a world reserve currency? It seems quite the contrary.
The argument seems to be that foreigners will keep buying US dollars because if they don't, the dollar will fall and they will incur big losses. There are several problems with this argument, but the biggest one is the assumption that foreign countries are motivated solely by financial concerns. If China could knock the US off its perch as top dog worldwide for the cost of a few hundred billion in paper losses, do you really doubt they would do so? That seems to me a relatively cheap way for them to take the mantle as #1.
Second, it just takes one relatively big player to begin dumping their treasuries, and others will quickly do so. The scenario would unfold very rapidly, like a bank run.
As for the argument that there's nothing else to invest in, look around you. There is a whole world of potential investments, from physical assets to financial assets, worldwide. While many of them now look shaky, I don't believe the US financial system is anywhere close to being the most stable among them. >>
I hear you, and what I have been trying to point out to the forum is that the USA is not alone. Europe has bigger social programs and problems than we do. Thats why the Euro is collapsing. If we are going to discuss the USA in relation tot he world, then we had better understand the shortcomings of the world. There is no other country that even comes close to the overall abilities of the USA and that is why it is the reserve currency.
What other assets could we use? Real estate, trees, coal, oil, seaweed? What other financial assets? Those backed by communist China? One of the poorest countries in the world, India? Corrupt Russia or Brazil? Or maybe oil which is backed by a religion? No, the only answer, at least during our lifetimes is the Great Ole USA.
Knowledge is the enemy of fear
It surpasses human discipline to carry this responsibiltiy for the globe. We have demonstrated that.
There needs to be some anchor for global finance beyond the trust-based dollar. It may be seaweed, but it cannot be the dollar.
Here's a warning parable for coin collectors...
I'd like to hear how it (if it does) controls the monetary systems of the world.
Steve
The only thing your missing is that we have just concluded a 37 year experiment like this and we're the ones who are broke or bankrupt. All of our major banks would be shown to be insolvent if the books would be opened up, several of our leading corporations are bankrupt (autos, airlines, etc), and so is the FED for that matter. This is hardly a winning recipe. While no doubt Iceland, UK, Ireland, Germany, France, and other Euro nations are in the same boat as we are, how does that help us? China, Russia, Brazil, and India are not in similar financial straights. That certainly doesn't help us.
Looks to me that we've missed the forest for the trees all for the sake of a few decades of living higher off the hog.
roadrunner
This country has a decent chance at being the next Iceland.
Banks aint too safe in Australia
People have had their money frozen in Canada for over a year.
Nothing good to read in these headlines.
Apparently the European banks have no confidence in each other.
No confidence in Indias currency.
Stuck in the mud for 20 years.
"Crisis of epic proportions" This country is a joke also.
No need to worry about the pound replacing the dollar. Now, Roadrunner, this is a country whose real estate I will agree can fall another 50%
Knowledge is the enemy of fear
<< <i>cohudk.
It surpasses human discipline to carry this responsibiltiy for the globe. We have demonstrated that.
There needs to be some anchor for global finance beyond the trust-based dollar. It may be seaweed, but it cannot be the dollar. >>
Why does everyone spell my screen name wrong. Im getting paranoid
This IS NOT A USA problem. All the worlds banks and political systems got us into this mess. The USA is the only country with the wherewithall to at least attempt to stabilze the system. Maybe we will fail, but even in failure we will be stronger than any other country regardless of the outcome.
Knowledge is the enemy of fear
What does he know?
Ren
This IS NOT A USA problem. All the worlds banks and political systems got us into this mess. The USA is the only country with the wherewithall to at least attempt to stabilze the system. Maybe we will fail, but even in failure we will be stronger than any other country regardless of the outcome. >>
Larry (I'm calling you Larry now, because I obviously can't spell your screeen name)
It is, indeed, a global problem. I did not mean to indicate that it was all our doing. My point was that the burden of an unsecured currency as the global medium of exchange is too onerous for any human organization to bear. The role was an anomaly of transient ascendency after WWII. The historical moment has passed, but everyone everywhere has nonetheless cashed in on the pretense that the moment survives, to our detriment.
Here's a warning parable for coin collectors...
I think you mean we will be less bankrupt than some other countries.
The USA (or GS & JPM) was the source of 95% of the opaque derivatives that now plague the world. It makes sense that we be the ones to try and fix it. Hence the $700B bail out package that will primarily be used to pay back trading partners like China that we invested with the virus. FWIT we didn't have the wherewithall in the 1930's to fix the problems and only made them worse. We are taking similar actions today to accentuate the downward trends for the sake of having taken "action." Those actions are destabilizing rather than stabilizing. BRIC will come out of this stronger than us because they have far less exposure to the toxic debt that we passed around the world.
The housing fiasco will last well into 2012 as the last group of no interest and ARM loans reset. By that point you will see your net 50% drop in more speculative RE regions. Parts of southern California have already fallen from $550K to $375K and don't have much further to go to reach the 50% mark of $275.
roadrunner
Spend your money fellas.
Steve
<< <i>Parts of southern California have already fallen from $550K to $375K and don't have much further to go to reach the 50% mark of $275. >>
Depends in part upon the rental market. In some areas a lot of single family homes or condos were built but not many new rental units. If the price of houses or condos continue to fall, and if interest rates stay relatively low, at some price point a mortgage payment becomes equal to or less than rent, or not much more than rent, and that encourages people to buy and at least have a tax deduction for their mortgage interest plus the opportunity for future appreciation. This puts a break on the decline in housing prices.
CG
And this I will agree with. Several areas were grossly overvalued, but surely not the entire country. Foreign real estate is still WAY WAY WAY overvalued and that is why they will suffer longer than us and why we will emerge first and the reason why the dollar will outperform over time.
Knowledge is the enemy of fear
roadrunner
......Bloomberg.com reports that Argentine bonds plunged, sending benchmark dollar yields over 24%, and stocks sank the most in a decade on speculation the government will nationalize pension funds in a bid to attain financing and stave off a second default this decade. President Cristina Fernandez de Kirchner will unveil a new pension fund plan at 4 p.m. New York time today, the country's social security administration said in a statement. Fernandez will nationalize the system, giving the government control of $29 bln in retirement accounts, La Nacion reported, citing government officials it didn't identify. Fernandez has struggled to raise cash to cover growing financing needs as the global financial crisis drives down prices on the country's commodity exports and erodes demand for higher- yielding, developing-nation debt. The government's borrowing needs will swell to as much as $14 bln next year from $7 bln in 2007, RBC Capital Markets, a Toronto-based unit of Canada's largest bank, said in a report today... Argentina's benchmark Merval stock index tumbled as much as 12.7% today to a four-year low, extending its losses this month to 36%.
Knowledge is the enemy of fear
<< <i>Agreed, our dollar will probably be less bankrupt than most European currencies....whatever good that is. Right now we are definitely ahead of Iceland and Zimbabwe. But I don't believe we'll stay ahead of China and India which is a problem.
roadrunner >>
So here is a question.......If we measure the value of the dollar vs a basket of currencies and if gold is valued vs the dollar, then how will we determine the price of gold if the dollar is stronger than all currencies but still a POS?
Knowledge is the enemy of fear